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Sarbanes-Oxley Act and Insider Trading around Financial Restatement Announcements
Oliver Li, University of Notre Dame
Yuan Zhang, Columbia University
ABSTRACT. We examine insider trading activities around financial restatement announcements before and after the passage of the Sarbanes-Oxley Act. Conditional on abnormal returns around restatement announcements, we provide evidence of net insider selling before the restatement announcements, absence of net insider selling immediately around the announcements, and net insider buying after the announcements, prior to the passage of the Sarbanes-Oxley Act. The passage of the Sarbanes-Oxley Act reduces informed insider selling before the restatement announcements. Our results suggest that insiders trade on privileged knowledge about the forthcoming restatement announcements to their advantage and that they trade in a pattern that minimizes the possibility of insider trading allegations or violating internal corporate insider trading policies. Our results also suggest the Sarbanes-Oxley Act appears to be effective in constraining insider trading on privileged information.
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